With the cost of renting at an all-time high, it’s becoming more and more difficult for first-time buyers to get a foot onto the property ladder.
No parent likes seeing their child throwing money down the drain on rent, which is why so many choose to offer their offspring financial assistance for a mortgage. In fact, the “Bank of Mum and Dad” now funds over a quarter of all home purchases.
So, if you’re in a position to help your son or daughter purchase their first house, what’s the most financially viable decision for your situation, and how do you minimise the possibility of any risks?
Ways parents can help their child buy a home
The most common way for parents to help is to cash in on savings or investments and give their child some, if not all, of the deposit required to qualify for a mortgage.
A gifted deposit is a sum of money given to you by a third party for a down payment on a property – usually from parents to a child – although some lenders accept gifts from other close family members.
Provided it is given without any expectation of it being returned, it is classified as a gift. This can be an effective way of boosting a deposit for access to more competitive rates, or a means of getting onto the ladder in the first place.
However, it’s very important that any gift is clearly distinguished and documented as such, as the implications are different than that of a loaned deposit.
In some cases, you may prefer to lend your child money for a deposit, with the intention of them repaying you at some point in the future.
A loan document should be signed by both parties, and detail the agreed repayment schedule, plus any interest payable. A loan agreement must be disclosed during a mortgage application so it can be factored into a lender’s affordability assessment.
It is also possible for parents to help their child purchase a home by acting as a mortgage guarantor. In this situation, the parent’s affordability will be assessed when a deal is agreed, with the theory being that the child receives better rates.
However, this can be a risky option because as a guarantor, you are agreeing to cover your child’s repayments in the risk of default, and you will be required to sign a contractual agreement stating so.
The number of lenders offering this type of mortgage is dwindling, so if you’re considering being a guarantor on your child’s mortgage, ensure to contact a whole-of-market broker for the most competitive rates on the market.
A slightly less risky option than acting as a guarantor is to take out a joint mortgage with your child. This is known as a “joint borrower, sole proprietor’ mortgage”, and many lenders offer this product.
The child’s name will appear on the title deeds of the property, but the parent will legally own a share, and you are both equally responsible for keeping up with the mortgage payments.
While both parties will need to demonstrate satisfactory affordability, having an extra name on the mortgage should mean that the child is eligible for a larger mortgage and access to a wider, better range of deals.
Offsetting your savings
Some lenders allow parents to offset their savings against the child’s mortgage, with some of the most popular products being the Barclays Family Springboard Mortgage and Lloyds Lend a Hand schemes.
Both schemes operate in similar ways; a parent provides “security” to their child’s mortgage by depositing 10% of the property value into a savings account. Provided all payments are made on time, the money is returned, with interest, after three years.
The benefit of such schemes is that, not only do you avoid the risk of being liable for your child’s mortgage for the duration of the term, rates can also be significantly cheaper than you’d expect from a typical home loan.
Other ways to help your child get a foot on the ladder
If you aren’t in a situation to be able to gift or lend your child funds for a deposit, or you’re unwilling to be directly liable for your child’s mortgage, you may decide to help your child out by borrowing money against your own home.
Remortgaging is the process of securing a new deal on your current mortgage. If you don’t have the cash at hand but want to contribute to your child’s deposit, you may be able to remortgage as a means to release equity in your own home.
If you don’t want to switch mortgage deals, an alternative is to obtain a secured loan against your home which can be used to fund your child’s property purchase.
If you’re over the age of 55, you could consider equity release. A lifetime mortgage is the most common form and enables you to take out a loan on your property in return for a lump sum – which could be used towards your child’s deposit.